Interest rate cut appears to be on the horizon

The Federal Reserve noted that inflation is moving closer to its 2% target after electing to hold rates steady at its July FOMC meeting.

A year removed from its last interest rate hike, the Federal Reserve (Fed) elected to leave the federal funds rate unchanged at the July 30-31, 2024, Federal Open Market Committee (FOMC) meeting. The decision marks the eighth consecutive FOMC meeting where the federal funds rate target range remained at its highest mark in 23 years at 5.25%-5.50%.

“Assuming there is no resurgence in inflation, which is our base case, the Fed has essentially set the stage for its first rate cut in four years, starting in September – also in our forecast,” said Raymond James Chief Investment Officer Larry Adam. “The Fed is clearly now equally focused on both the slowing economy and labor market, and not just inflation.”

In its post-meeting statement, the FOMC noted that “inflation has eased over the past year but remained somewhat elevated. In recent months, there has been some further progress toward the committee’s 2% inflation objective.”

Markets have targeted September’s FOMC meeting for when the first interest rate cut will take place, and while the post-meeting statement provided no clear indicators of when a rate cut would be forthcoming, Fed Chair Jerome Powell noted in his press conference that September could be on the table.

“The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate,” said Powell. “The question will be whether the totality of the data, the evolving outlook and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”

While Powell said the Fed believes that monetary policy is finally restrictive, Raymond James Chief Economist Eugenio Alemán offers a reminder that “monetary policy is becoming more restrictive because as inflation continues to moderate, the real federal funds rate continues to increase.”

With more evidence that the Fed will cut interest rates and elongate this recovery, economically sensitive areas of the economy such as small caps, technology, consumer discretionary and industrials surged on the news.

The bond market also continues to be bolstered by the prospect of the Fed cutting interest rates, noted Adam, as the 2-year and 10-year Treasury yields fell to nearly six-month lows.

The next FOMC meeting takes place September 17-18.

All expressions of opinion reflect the judgments of the Raymond James Chief Investment Officer and Raymond James Chief Economist and are subject to change.

There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.